The Slice & Dice Investment Co. needs some help understanding the intricacies of bond pricing. It has
Question:
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a. How much should Slice & Dice be willing to pay for a three-year bond that pays a 6-percent coupon, assuming annual coupon payments start one year from now?
b. What is the yield to maturity of the three-year coupon bond?
c. Suppose Slice & Dice purchases this coupon bond and then €œun-bundles€ it into its four component cash flows: three coupon payments and the par value amount. At what price(s) can Slice & Dice resell each of the first three cash flows (the coupon payments) today?
d. The remaining cash flow (the face value amount) is a €œsynthetic€ three-year zero coupon bond. How much must this €œstrip bond€ be sold for if Slice & Dice is to break even on the investment?
e. What is the yield to maturity on the synthetic three-year zero coupon bond?
f. Why are the answers for (b) and (e)different?
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
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a We do not have a yield to maturity figure with which to discount all the cash flows coupons and fa...View the full answer
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Related Book For 
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
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